Beats | April 15, 2020

Resilience and disruption: Agents of Impact share lessons from the pandemic

David Bank
ImpactAlpha Editor

David Bank

Editor’s note: It seems the coronavirus pandemic could bring out either the worst or the best in us. The clear intent of the growing community of Agents of Impact: Let’s make it the latter.

We’re using this post (bookmark it!) to update your dispatches from the global mobilization. Please send us yours at [email protected]

Two themes are emerging from your incoming contributions. First, resiliency has tangible value. Investments made in knitting together ecosystems and networks of trust help communities, companies and portfolios weather the inevitable surprises of pandemic, recession or climate change.

Second, what if the global behavior change caused by COVID-19 *is* the long-predicted sustainability disruption? The clearest example: A thing few thought was possible – a dramatic drop in global carbon emissions – has just been achieved. Why revert? (see “The carbon disruption is here, disguised as a pandemic“).

The spirit of generosity, gratitude and optimism that animates so many Agents of Impact will go a long way in the current crisis. As Laura Ortiz writes from SVX Mexico, “Our job is healing ourselves, making ourselves whole, connecting with what life really is: water, soil, freedom, walking, the flow of love between us and life and our home planet.”

– David Bank, editor

Market Observations and Lessons Learned

Korn Ferry’s Kate Shattuck reports the search firms’ Impact Investing and ESG practice is seeing “a strengthening of ESG commitment in this crisis that gives me confidence in our shared commitment to the space.” She shares some lessons learned and best practices:

  • “C-suite leaders and boards are attuned to the cares and concerns of their people and potential candidates.  In some cases, with current projects, we have slowed down processes to accommodate those candidates that are responding to the crisis.  Hiring managers, leaders, and boards are leading with more empathy than I have ever seen before.  In some cases, we have had hiring managers lead with comments like, ‘If this isn’t a good time due to the health and safety of them or their family, we will wait.’
  • “We have had some uptick and interest in adapting compensation schemes to this new environment and additional interest in training for middle managers on how to adapt and lead in crisis.
  • “Leaders are asking for help from their boards and advisors on the tactical – how to onboard new employees virtually, how to engage volunteers and stakeholders, how to best communicate to their board and how often?  And the strategic – critical importance of liquidity, accelerating investments in infrastructure and seeking previously available critical skills and leadership (“my golden handcuffs aren’t so golden anymore”).
  • “Great CEOs are communicating their organization’s purpose:  simply and concisely with personal examples that convey the organizations values.
  • “‘Virtual Gravitas’ is the new Executive Presence – can a person come across genuine, confident, humble, personable and above all else genuine and trustworthy on video?
  • “The one area of candidate reticence is relocation – right now, candidates generally are more risk averse to relocation – they don’t want to be the last in and first out if an organization.”

Doubling down on core values 

“No one can claim to have absolute wisdom or visibility during these times – at Elevar we certainly don’t,” writes Elevar’s Sandeep Farias. “Nonetheless, we believe there is a premium for decisiveness and proactive action.” Farias offers a few themes core to Elevar’s approach:

  • Staying connected to customers can prove to be a critical key lever to Elevar’s commercial model to impact investing. “In the past, we have seen our customer segment demonstrating resilience (which we have learnt we should never underestimate) and, often, decoupled from macro-level trends,” Farias writes. “But we fear that the fragile social safety nets, poor healthcare infrastructure, reduced mobility, impact of lockdowns on businesses, and high dependency on retail jobs and small enterprises will leave low income communities vulnerable, bearing the economic brunt of this crisis.”
  • Partnership with entrepreneurs. “We need to be nimble to best support our entrepreneurs who are building transformational companies,” Farias says. ” We have been  in particularly close contact with them now, with an eye towards what we can do to provide maximum support.” He said entrepreneurs have exchanged notes on customer insights, shared expertise and initiatives, and engaged on potential cross-revenue opportunities.
  • Build value. “We are in active conversations with our investors to understand the realities of  capital availability for our portfolio companies in the future,” Farias adds. Some investors are co-investors in Elevar’s portfolio companies as well. “We are urging them to double down on the commitments we have already made to our portfolio companies, because we believe those investments carry long-term value.”

As Elevar said in a letter to its entrepreneurs last month: This is the time for all of us to double down on our core values.

Cash is king

“Risk means not having cash when you need it,” said Heron Foundation’s Clara Miller (citing the late Peter Bernstein). “The thing that matters the most is right now is cash, cash, cash, agreed Visa Foundation’s Graham Macmillan. On Visa’s payments side, he said, “We’re witnessing a lot of very profound disruptions in industries.” 

Emergency tools

The lesson of the Ebola recovery, says Laurie Spengler: quickly put in place financial instruments for stabilization. A stabilization fund for emerging markets is under discussion by major development finance institutions. In the U.S. Community development financial institutions will have a key role to play in providing relief to vulnerable communities. They “are preferred lenders in low-income communities and can be a channel for emergency funds from the Small Business Administration,” Spengler says. Caveat: Many CDFIs are themselves at risk as they are disproportionately exposed to businesses that have suddenly lost their revenues, including food and retail hubs, arts organizations and, critically, health clinics. Housing lenders will see an immediate reduction in rent rolls as tenants lose their incomes. 

Repayment holiday

Beneficial Returns is offering borrowers a three-month payment holiday. “Managing the cash of a social enterprise is plenty hard without a pandemic turning everything upside down,” says Beneficial’s Ted Levinson. The impact investment fund’s investors agreed to their own holiday , including not cashing checks Beneficial had already sent. Levinson hopes it will inspire others. “This is a time for impact investors to be bold,” he says. The Soros Economic Development Fund will consider bridge financing or follow-on investments in portfolio companies (and has mobilized an investment team to look for impact investing opportunities to respond to the COVID-19 crisis). 

Local relief

Candid (created by the merger of Guidestar and Foundation Center) is tracking COVID-19 relief funds established by U.S. foundations for nonprofits and affected populations. A sampling: The Baltimore Community Foundation is targeting the area’s workforce and vulnerable populations; Chicago Community Trust, United Way and the city of Chicago are focused on nonprofits providing emergency services. San Diego-based Mission Driven Finance has a running list of local support, including the San Diego Foundation’s Community Response Fund,  the Restaurant Workers Community Foundation’s Emergency Relief Fund, and a forthcoming San Diego Small Business Relief Fund. SOCAP Markets is compiling resources for social enterprises. Nexus, a global network of philanthropists, impact investors and social entrepreneurs, has gathered a list of COVID-related resources for nonprofits.

Flexible capital

Flexibility is the watchword on Mission Investors Exchange’s round-up of crowdsourced ideas for shoring up grantees and portfolio companies. Practice patient capital, amend credit policies to allow for flexibility, help investees keep the doors open, and provide grants and technical assistance when appropriate, advises Local Initiative Support Corp.  “Be willing to assist with bridge capital to shift and pivot business models,” tweeted Nia Impact Capital’s Kristin Hull. Not all businesses are going to survive the next few months, says Mission Driven’s David Lynn. The priority, he says, should be those that support fair wages and gender and racial equity. 

Survive first, then regenerate

Survival is top of mind for the millions of people who work for small businesses that live week-to-week, says Blueprint Local’s Ross Baird. “I think we’re seeing a lot of symptoms of deeper cuts that we have,” he says. “We’ve been bleeding for a long time as a society and as a planet. People don’t realize they’re bleeding until they feel faint.”

Long-term strategies

“We are seeing various proof points play out across public markets for impact focused investments outperforming broader benchmarks,” writes Align Impact’s Jennifer Kenning. “But rather than reveling in the short-term outperformance as an indicator of some superior thinking, our focus is on executing on long-term strategies that solve systemic social and environmental challenges.”

“These challenges rear their heads more prominently in a time of crisis but are at work all the time,” she continued. “With the inherently collaborative nature of work being done across impact investments, our expectation is that the community and the relationships we have helped our clients build across the value chain will be more resilient to short-term shocks than any distressed businesses would.”

The limits of private finance

“What I’m seeing in the U.S. is an over-reliance on capital for returns in impact and public-private partnerships,” says Kellogg School of Management’s Megan Kashner.  In the public health space, “when we see the public half of public-private partnerships isn’t well sustained operationally and financially, then no amount of private finance in that partnership is going to be enough.”

“In a system where health services are not public, in a system where what we can offer our population is a delay in terms of when their taxes are due, but not relief, where we can offer small business loans but not grants,” continues Kashner, “what we’re going to see in 3-4 years after this is cases being written about the limitations of finance for returns when it comes to social good, public good and public health.”

Outcomes, upskilling and reskilling still urgent

“Disadvantaged populations are the first to suffer and the last to recover. Our impact investing approach at Social Finance is about improving the lives of the most vulnerable and creating a business model around it,” writes Social Finance’s Tracy Palandjian. “The social impact bond focuses government resources on outcomes and the career impact bond helps low-income populations to get on a pathway to economic well being without financial risk. Both pay for success strategies are enabled by impact-first, catalytic capital.”

“Re: social impact bonds, amidst this crisis, we are seeing many local governments redirect resources towards crisis management, and tightening budgets for broader, less urgent social support. At the same time, Congress has introduced a $8.3 billion emergency spending package. In this moment, what can we do to ensure that dollars are spent on achieving outcomes – both in addressing the growing health and economic challenges, and in continuing to support new community needs, such as online education?

Re: career impact bonds, upskilling and reskilling low income Americans while addressing the skills gaps facing many employers will be increasingly urgent. We are focused on recession resistant jobs such as healthcare (nursing and allied health professions) and IT (coding and systems administration). These middle skills occupations do not require a four-year college degree.”

Pay back with your impact

A radical version of impact-linked loans can help enterprises that serve the poor bridge liquidity gaps and stay focused on customers and communities that need their solutions to cope with the coronavirus crisis. A Pay-Back-With-Your-Impact loan would provide “debt forgiveness as a reward for achievement of pre-defined impact performance,” says Roots of Impact’s Bjoern Struewer, who has pioneered Social Impact Incentives (see, “Social impact incentives aim to tilt businesses toward the needs of the poor). Such a contract can be signed in a matter of days.

Celebrate local capacity

‘Disaggregated production’ may be a reasonable strategy moving forward, says Laura Callanan of Upstart Co-Lab. Callanan points to Upriver Studios, Mary Stuart Masterson’s Hudson Valley-based film production company that’s “making local work” outside of Hollywood (see, “Investing in the impact of powerful new voices in film and video games).

Callanan also points to Greenbelt Hospitality, a collaboration of farmer Matthew Moore and restaurateur Aric Mei, that’s embedded a restaurant experience into a two-acre working urban farm in Phoenix. Both companies, says Callanan, “are examples of how we can have world-class experiences, engage in top-quality work and do it at home rather than by moving and traveling.”

Callanan says the coronavirus recession has her worried “that investors back away from commitments to impact entrepreneurs and a generation of good ideas, high potential companies and talent is stalled or lost.” A corollary might be that investors back away from ESG, socially responsible and impact investment funds  “especially the smaller, newer, thematically-focused and women-led, people of color-led groups that are more impact-focused, instead gravitating to the larger firms and larger funds that are weaker on real impact — or to conventional funds and advisors.”

Another worry: “Philanthropy prioritizes its own intergenerational neutrality and purchasing power rather than addresses the crisis, effectively pitting grantees and issues areas against one another. Field-building support for  impact investing is under-rated for its importance at this moment.”

Volatility hedge

The market downturn won’t immediately hit Opportunity Funds raising capital, as investors are still looking to reduce their 2019 capital gains, which were huge. Going forward, the capital gains tax breaks that fueled interest in Opportunity Zones are likely to be much less of an attraction, says Jeremy Keele of Catalyst Opportunity Funds (see, “Catalyst seeks to demonstrate positive impact with initial Opportunity Zone investments).

Motivated in part by the opportunity zone incentive, large family offices are moving full speed ahead with real-estate diligence and investments as other investors are distracted by market upheavals and shutdowns. Keele reminds us that some “impact” sectors offer protection from broader market swings. “Many of our investments target affordably priced multi-family housing where we expect renter demand will continue, or perhaps increase, during a potential recession.”

Deepen connections and be patient

That  necessary responses to the virus may be separating us is a good reminder of “how deeply connected we are and how impact investing at its core recognizes the connection between people, place, and planet,” says Michael Whelchel of Big Path Capital, which is taking its April 21 Global Impact Capitalism Summit virtual. “Impact investing is intellectually honest to how our investments are intertwined with community and planet and recognizes that we are connected to each other more than we can imagine.”

The general effect on impact venture capital and private equity will depend on how long the pandemic lasts, says Impact Engine’s Priya Parrish (see, “The three dozen investors putting Chicago on the impact investing map).  “I believe there is enough momentum in impact investing that I don’t believe the industry will face a setback disproportionate to other strategies,” she says. “My experience is that good opportunities come out of market dislocations for patient investors.”

Choices and scenarios for ESG in a time of pandemic

The coronavirus could be “a death knell” for environmental, social and governance investing “and set back investor responsibility for a generation,” writes Preventable Surprises’ Jérôme Tagger. Or, it could prompt “a re-think of capitalism and the global financial system.” Acting decisively on one systemic risk – the pandemic – he says, increases the world’s capacity to respond to other systemic risks – think climate change. Read on.

Four scenarios for ESG in a time of pandemic

Portfolio resilience

“We were NOT predicting a virus. But we certainly have been aware of the potential for a black swan event to trigger a re-pricing of liquid assets,” Matthew Weatherley-White of Caprock Group reports from Boise, Idaho. “We’ve been steadily rolling down our exposure to leveraged assets on the premise that the credit cycle was stretched and that credit was more likely to contract than to expand at a rate anything like what we’ve seen since the Great Financial Crisis.”

He says Caprock’s impact portfolios appear to have experienced incrementally less volatility than conventional portfolios. “Which makes a ton of sense. If you don’t have exposure to carbon-intensive industries or money centers, you’ve certainly taken a hit but so far dodged the worst of the damage. Which is, of course, the whole point. ESG is a risk-mitigator just as much as it is an opportunity identifier.”

  • Least worst. Of 2,800 ESG-themed funds analyzed by Bloomberg last week, 400 were in positive territory, and that was before the stock market’s Friday rebound. ESG funds opened before 2015 performed particularly well. Overall, ESG funds fell an average 12.2% (again, before Friday rebound), about half the rate of the S&P 500 decline. “Potential for outperformance may be related to the longer-term nature of good ESG integration,” said Cornerstone Capital’s Erika Karp.
  • Fossil free. “Our flagship fixed income strategy has been fossil fuel free for 20 years and we have been able to avoid exposure to the energy names that have been hard hit by the recent turmoil,” reports Community Capital Management. “We are invested in companies with strong ESG ratings and track records that we think are equipped to come out of this period stronger than ever.”

This is not an era of changes. It is a change of era.

“A system that counts its self-destruction (wars, sickness) as progress (GDP) is bound to break at some point,” writes Laura Ortiz of SVX Mexico. The S&P 500 may only recently have taken a hit, but “but the underlying assets (social & natural capital) had been in depletion for a while now.” This is not an era of changes, it is a change of era, Ortiz says.

“The material degrowth of the planet is not an option but a data point. Human life is not a certainty but a possibility. I think this past week just makes the obvious more visible. Our job is healing ourselves, making ourselves whole, connecting with what life really is: Water, soil, freedom, walking, the flow of love between us and life and our home planet. Regeneration will emerge from our healing: It is inevitable.”

Hold tight and ride it out

“Cultivating a resilient way of life means preparing for shocks to the economic system before they occur,” writes Natural Investments’ Michael Kramer, co-author of The Resilient Investor: A Plan for Your Life, Not Just Your Money. “This crisis is an excellent wake-up call for people to take personal life planning seriously and to develop and embrace a resilient mindset and lifestyle. It is also a time to remain calm and focus on whatever gives one peace of mind, for this ultimately is far more important than rates of return.”

He said he has received only two emails from concerned clients in recent weeks. “In theory, a virus shouldn’t be able to bring the global economy to a halt, or even a recession. It is likely a temporary disruption. The prudent course is to hold tight and ride this out. As such, the current volatility is not something that would cause us to change our investment advising philosophy; we prefer to make adjustments primarily based on our clients’ specific circumstances and needs and not rampant fear that causes the very conditions we all wish to avoid.”